Goldman boosts returns to shareholders through layoffs

Lauren Tara LaCapra

4 Min Read

Traders work on the floor of the New York Stock Exchange near the Goldman Sachs stall July 16, 2010. REUTERS/Brendan McDermid

(Reuters) - Goldman Sachs Group Inc paid a smaller portion of its revenue to employees in 2012 as it laid off staff, signaling that management at the top Wall Street bank may be listening to shareholders demanding higher returns.

The investment bank and asset manager said fourth-quarter earnings nearly tripled as it set aside less of its revenue for pay and earned more from trading. For the full year, employees were paid just 37.9 percent of the bank’s revenue, the second-lowest proportion since Goldman went public in 1999.

“Quite simply, we don’t look to overpay anybody,” said Harvey Schwartz, a Goldman Sachs trading executive who will become the bank’s chief financial officer at the end of this month.

Even if a smaller share of revenue went to employees, Goldman Sachs managed to increase average employee pay last year because it laid off staff and took in more revenue. In other words, the bank’s employees were more productive, but much of the benefit went to shareholders.

Analysts said other banks are likely to feel pressure to keep their compensation expenses in check after Goldman’s results. But for Morgan Stanley, the second-biggest stand-alone U.S. investment bank, cutting costs aggressively could be tough because analysts believe its revenue fell last year.

Goldman missed the worst pitfalls of the financial crisis but has suffered public relations embarrassments from trades it executed during the crisis and comments from executives afterward. The bank is struggling to figure out how to navigate the post-crisis world, in which clients trade less and regulations crimp profits in many businesses.

With many banks facing the same problems, analysts expect layoffs across Wall Street. Morgan Stanley plans 1,600 job cuts in 2013, while Goldman cut 900 jobs in 2012, equal to about 3 percent of its work force.

Goldman posted fourth-quarter earnings of $2.8 billion, or $5.60 per share, up from $978 million, or $1.84 per share, in the same period a year ago.

Analysts’ average earnings forecast was $3.78 per share, according to Thomson Reuters I/B/E/S.

Goldman shares rose 3.2 percent to $139.93 in midday trading.

A significant part of Goldman’s earnings boom came from improvements in market values in the stock and bond markets, as well as increased activity from clients.

The bank said it took in “significantly higher” revenues from credit products and mortgages in its bond-trading business. Its investing and lending division, which earns money mostly from higher values on Goldman’s own stock and bond investments, reported nearly $2 billion worth of revenue, compared with $872 million a year earlier.

But gains were broad, with revenue up across each of Goldman’s business lines, from investment banking to investment management. Overall, revenue jumped 53 percent to $9.2 billion.

The bank said compensation expense, typically the biggest cost for Wall Street firms, fell 11 percent in the fourth quarter from a year earlier. The expense was just 21 percent of net revenue, roughly half of what the firm usually pays out to employees.

In 2009, a record year for earnings, Goldman paid out 35.8 percent of revenue to employees. But for the last five years the figure has averaged closer to 42 percent.

On average, Goldman employees earned $399,506 apiece in 2012, up from $367,057 in 2011.

Setting aside less money for pay helped Goldman post a return on equity of 16.5 percent for the fourth quarter on an annualized basis, the highest level in almost three years. The figure is closely watched by shareholders because it measures how much profit Goldman can wring from its balance sheet.